Myth Busted: Can AIFs in India Conduct Annual Valuations Instead of Six-Monthly?
The Short Answer: Yes, But Only If You Know SEBI Regulation 23(2)
If you manage a Category I or Category II Alternative Investment Fund (AIF) in India, you've likely been told that SEBI mandates six-monthly valuations. While that's the default, there's a little-known provision that could save your fund ₹6-7 lakhs annually in valuation costs and it's 100% compliant.
Let me show you exactly how Regulation 23(2) of the SEBI (Alternative Investment Funds) Regulations, 2012 allows annual valuations, who qualifies, and why most fund managers miss this opportunity.
The Widespread Myth About AIF Valuation Frequency
What Most Fund Managers Believe ?
The AIF industry operates under a pervasive assumption: SEBI requires all AIFs to conduct valuations every six months, no exceptions. This belief is so entrenched that fund managers budget accordingly, engage independent valuers bi-annually, and structure their reporting calendars around this timeline.
Where This Misunderstanding Comes From ?
The confusion stems from a surface-level reading of Regulation 23(1), which states:
"The sponsor or the manager of the Alternative Investment Fund shall ensure that the investments of the schemes of the Alternative Investment Fund are valued by an independent valuer as per the valuation norms specified in ninth schedule, at such intervals as may be specified by the Board."
Without diving deeper into Regulation 23(2), most practitioners stop here and assume six-monthly is mandatory.
The Legal Reality: What SEBI Regulation 23(2) Actually Says
The Exact Text of the Exemption
SEBI (Alternative Investment Funds) Regulations, 2012, Regulation 23(2) clearly states:
"The manager of a Category I or Category II Alternative Investment Fund may, subject to consent of seventy-five per cent of the investors by value, conduct valuation of investments on an annual basis."
Let me break down what this means:
Key Legal Elements:
- Applicable to: Category I and Category II AIFs only (Category III AIFs remain six-monthly)
- Consent threshold: 75% of investors by value, not by headcount
- Valuation frequency: Annual (once per financial year)
- Independent valuer: Still mandatory, just less frequent
Why SEBI Created This Provision ?
The Securities and Exchange Board of India isn't arbitrarily flexible. This provision exists for sound economic and practical reasons:
Cost Efficiency for Stable Portfolios
For AIFs investing in mature companies, infrastructure projects, or real estate with minimal quarterly fluctuations, bi-annual valuations add marginal informational value but significant cost. Annual valuations reduce administrative burden without compromising transparency.
Alignment with Fund Life Cycles
Category I AIFs (venture capital, SME funds, infrastructure funds) and Category II AIFs (private equity, debt funds) typically hold investments for 3-7 years. For long-term, illiquid assets, six-monthly snapshots often show negligible changes, making annual assessments more practical.
When Annual Valuation Make Sense for Your AIF ?
Ideal Scenarios for Annual Valuation
1. Stable Portfolio Companies with Predictable Cash Flows
If your AIF invests in established manufacturing firms, regulated infrastructure projects, or mature service businesses with audited financials and steady EBITDA, quarterly volatility is minimal.
Example: A Category II private equity fund holding a 40% stake in a Tier-2 city-based logistics company with 5-year PPAs (Power Purchase Agreements) and stable revenue.
2. Long-Gestation Infrastructure Projects
Category I infrastructure AIFs funding toll roads, renewable energy plants, or ports see value accrue gradually. Six-monthly valuations often reflect identical DCF assumptions.
3. Real Estate AIFs with Completed, Leased Assets
For AIFs holding commercial real estate with long-term lease agreements to creditworthy tenants, rental yields and property values remain stable year-round.
When You Should NOT Use Annual Valuations ?
1. High-Growth Startups with Frequent Funding Rounds
Venture capital AIFs backing Series A/B startups in fintech, edtech, or SaaS must conduct six-monthly valuations due to rapid valuation changes from new funding rounds, pivot risks, or burn rate concerns.
2. Distressed Asset Funds
Category II funds acquiring stressed assets under IBC (Insolvency and Bankruptcy Code) face unpredictable recovery timelines, making frequent valuations essential.
3. Funds Approaching Exit or Fundraising
If your AIF is preparing for investor exits, secondary sales, or raising a successor fund, six-monthly valuations provide more granular performance data to prospective LPs.
Cost Savings: The Financial Case for Annual Valuations
Real Numbers from the Indian AIF Market
Independent Valuer Fees (Per Valuation Cycle):
- Small AIF (5-8 portfolio companies): ₹3-3.5 lakhs
- Mid-sized AIF (10-15 portfolio companies): ₹5-7 lakhs
- Large AIF (20+ portfolio companies): ₹8-12 lakhs
| AIF Size | Six-Monthly Valuation | Annual Valuation | Annual Savings | 7-Year Savings |
|---|---|---|---|---|
|
Small AIF (5-8 cos) |
₹6.5 lakhs/year (2 cycles × ₹3.25L) |
₹3.25 lakhs/year | ₹3.25 lakhs | ₹22.75 lakhs |
|
Mid-sized AIF (10-15 cos) |
₹12 lakhs/year (2 cycles × ₹6L) |
₹6 lakhs/year | ₹6 lakhs | ₹42 lakhs |
|
Large AIF (20+ cos) |
₹20 lakhs/year (2 cycles × ₹10L) |
₹10 lakhs/year | ₹10 lakhs | ₹70 lakhs |
Key Insight: For a mid-sized ₹200 crore AIF, the ₹6 lakh annual savings represents a 0.03% cost reduction—directly improving net IRR for investors over the fund's lifecycle.
How to Implement Annual Valuations: 3-Step Process
Step 1: Amend Your Valuation Policy and Obtain Board Approval
Action Items:
- Draft an amendment to your AIF's valuation policy document
- Specify the shift from six-monthly to annual valuation frequency
- Obtain approval from the fund's board/investment committee
- Document the rationale (cost efficiency, portfolio stability)
Timeline: 2-3 weeks for board circulation and approval
Step 2: Secure 75% Investor Consent by Value
How to Calculate Consent by Value
Not 75% of investors by headcount—it's 75% of total capital commitments.
Example Calculation:
- Total AIF commitment: ₹100 crores
- Investor A (₹40 cr) + Investor B (₹35 cr) = ₹75 crores
- Even if 8 other investors (₹25 cr combined) dissent, you have 75% by value
Consent Collection Process
- Send formal communication explaining Regulation 23(2)
- Provide cost-benefit analysis (use the table above)
- Set 30-day response deadline
- Treat non-responses per your PPM (typically counted as abstentions, not dissents)
Timeline: 4-6 weeks for investor outreach and consent documentation
Step 3: Update Your PPM and Inform SEBI
Documentation Requirements:
- Update Private Placement Memorandum (PPM) to reflect annual valuation frequency
- File updated PPM with SEBI
- While SEBI doesn't require pre-approval for this change, maintain documented investor consent for regulatory audits
Timeline: 2-3 weeks for PPM amendment and SEBI filing
4 Critical FAQs About Annual AIF Valuations
Q1: Will SEBI object to annual valuations if we have 75% consent?
Answer: No. Regulation 23(2) is explicit. As long as you have documented consent from 75% of investors by value and maintain your independent valuer engagement, SEBI cannot object. This is a regulatory right, not a discretionary exemption.
Regulatory Backing: This provision has been in SEBI (AIF) Regulations since 2012 and was reaffirmed in the September 2024 amendments.
Q2: Do we need to inform SEBI before switching to annual valuations?
Answer: There's no requirement for prior SEBI approval. However, update your PPM and ensure your next SEBI filing reflects the change. Maintain an audit trail of investor consent for at least 7 years (standard record-keeping requirement under SEBI regulations).
Q3: How is the 75% threshold calculated by number of investors or capital?
Answer: By value (capital commitments), not headcount. If your largest 3 LPs represent 75% of committed capital, their consent alone suffices.
Example Scenario:
- 10 total investors in your AIF
- Top 3 investors hold ₹150 crores (75% of ₹200 crore total commitment)
- Bottom 7 investors hold ₹50 crores (25%)
- Result: You only need consent from the top 3 to reach the 75% threshold
Q4: What happens if investors don't respond to our consent request?
Answer: Your PPM should specify how non-responses are treated. Industry standard: non-responses are not counted as dissent. If 75% of responding investors (by value) consent, you proceed. Document your outreach attempts meticulously.
Best Practice: Send consent requests via:
- Email with read receipt
- Registered post
- WhatsApp/SMS reminder
- Follow-up call (document date and time)
Conclusion: Strategic Compliance Creates Value
Regulation 23(2) isn't a loophole it's a deliberate provision recognizing that not all AIFs require six-monthly valuations. For funds with stable, long-term holdings, annual valuations reduce costs, administrative burden, and reporting complexity without compromising investor transparency.
The ₹6-7 lakh annual savings might seem modest for a ₹500 crore fund, but for emerging fund managers or first-time AIFs, these efficiencies compound over a fund's lifecycle.
The real question isn't whether you can do annual valuations it's whether you can afford not to.
Need help structuring your Regulation 23(2) consent process or drafting your valuation policy amendment? Our team specializes in AIF regulatory compliance and has helped 40+ fund managers optimize their valuation cycles while maintaining SEBI compliance.
Disclaimer: This blog provides general information about SEBI AIF Regulations and should not be construed as legal or financial advice. Always consult with SEBI-registered intermediaries and legal counsel before making changes to your fund's valuation policy.